We are also raising our issue-level rating on the company's first-lien
credit facility to 'B' from 'B-' in conjunction with the corporate credit
rating upgrade; and revising the recovery rating to '3' from '4' to
reflect better recovery prospects on this debt facility because of
improving business fundamentals.

The outlook is stable, reflecting our expectations that the company will
sustain its positive operating momentum, benefiting from improved digital
capabilities and in-person meeting formats that should drive another
successful winter recruiting season and help further strengthen debt
leverage toward the low-6x area at the end of 2017.

At the same time, we raised our issue-level rating on the company's first-lien
credit facilities, consisting of a $50 million revolving facility expiring in
2018 and a $2.1 billion term loan due in 2020, to 'B' from 'B-'. In addition,
we revised our recovery rating on these debt facilities to '3' from '4'. The
'3' recovery rating indicates our expectation for lenders to receive
meaningful (50%-70%; rounded estimate: 55%) recovery in the event of a payment
default.
The company's funded debt as of July 1, 2017, is about 1.9 billion.
Our ratings upgrade reflects our belief that the company's improved operating
performance has resulted in higher revenue and EBITDA growth ahead of our
expectations and stronger credit measures. We now expect leverage to improve
toward the low-6x area by the end of 2017, from about 7.3x at the end of 2016,
and we expect Weight Watchers will generate about $100 million in free
operating cash flows this year.
The stable outlook reflects our expectation that the company will sustain its
recent operational improvements as it benefits from new membership growth and
higher retention rates that will continue into the 2018 winter recruiting
season. Furthermore, we expect the company's financial policy with respect to
debt-financed dividends or acquisitions to be in line with our current
expectations that leverage remains below 7x.
We could also lower our ratings if the company's operational performance
deteriorates because of a tougher competitive environment or an unsuccessful
2018 winter recruiting season, resulting in leverage exceeding 7.5x and
significantly weakening the company's cash flow generation. We estimate this
could occur if EBITDA declines about 20% from current levels, while debt
remains constant.
In addition, we could lower the ratings if the company's financial policies
become more aggressive and it issues debt to fund shareholder returns. We
estimate that about $500 million of incremental debt at current EBITDA levels
would likely result in leverage exceeding this threshold.
Although unlikely over the next year, we could raise our ratings if the
company's operating performance exceeds our expectation, debt to EBITDA
improves below 5x, and its private equity sponsor formally commits to
sustaining this leverage or to reduce collective ownership to below 40% and
relinquish control of the company.